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Over a two year time horizon an investor experiences the following net cash flows: Year 0 1 2 Cash flow -$8,000 $5,280 $5,320 What is
- Over a two year time horizon an investor experiences the following net cash flows:
Year | 0 | 1 | 2 |
Cash flow | -$8,000 | $5,280 | $5,320 |
What is the internal rate of return for the investor?
Demonstrate that a bank deposit offering an annual rate equal to the internal rate of return can replicate the above set of cash flows for the investor.
(7 marks)
- A stock traded at an average price of $30 over the course of a trading day. The covariance of successive transaction price changes (trade-by-trade changes in the price) is about -0.05. Using Rolls model, what is your estimate of the bid-ask spread of the stock (measured in percent of the average price of $30)?
(9 marks)
- The market index has average return 8% and standard deviation 25%. The risk-free rate is 3%. A portfolio A has beta 0.9, idiosyncratic variance of 0.05, and an M2-measure of 0.02. What is the average return on the portfolio?
(9 marks)
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